BANK OF JAPAN

BOJ finds itself in ‘unpresidented’ state

The divided Diet has left the Bank of Japan with a vacant seat at the top for the first time since the war. This came about after Toshihiko Fukui’s five-year term ended in mid-March and the government’s nominees to succeed him were vetoed.

Following is a brief look at the central bank, its functions and relationship with the government:

What are the roots of the BOJ?

The BOJ began operations on Oct. 10, 1882, with ¥10 million in capital.

Several years earlier, the government needed money to finance the huge cost of the Seinan civil war of 1877. The expedient way out was to print cash, which the government did, issuing too many bank notes and causing hyperinflation.

This led to the creation of the BOJ as a body separate from the government that would be in charge of issuing legitimate bank notes.

In 1942, the BOJ was reorganized under a new BOJ Law. Reflecting the wartime totalitarianism, the bank’s mission was “regulation of the currency, control and facilitation of credit and finance, and the maintenance and fostering of the credit system, in line with national policy.”

The current BOJ Law took effect in 1998, aimed at giving the bank independence from the government and transparent decision-making.

About 4,900 employees now work at the BOJ’s headquarters in Chuo Ward, Tokyo, 46 regional branches and seven overseas branches, including in Washington and London.

What kind of an entity is the BOJ? Is it government-owned?

It is not a government agency or public corporation. But of its current capital of ¥100 million, ¥55.045 million is owned by the government.

The government’s stake is required by law to stay above 55 percent due to the BOJ’s public nature. But to ensure its independence, the law bans investors, including the government, from participating in BOJ management.

The remaining 45 percent is owned by the private sector. Individual investors make up 39.4 percent and financial institutions 2.5 percent. Other than the government, the BOJ does not disclose who the other large shareholders are.

In fact, the BOJ is listed on the Jasdaq market, now traded around ¥115,000. BOJ shares peaked on Dec. 8, 1988, just before the burst of the bubble economy, at ¥755,000.

BOJ officials are not public servants but can be punished, just like bureaucrats, for offenses that include bribery and violating confidentiality laws.

What is the mission of the BOJ and what does it actually do?

The BOJ has two missions: maintain price stability and financial system stability.

It controls the amount of currency in the market by adjusting the benchmark short-term borrowing rate for banks. Commercial banks usually raise money in the short-term money market for financial institutions.

If there are too many borrowers, the interest rate will rise. So the BOJ engages in buying operations, purchasing financial products, including government bonds, and pouring cash into the market so the interest rate stays where the BOJ wants it — currently at 0.5 percent.

If sellers flood the market, the BOJ executes selling operations, unloading its holdings of government bonds and other financial assets to withdraw cash from the market.

The BOJ Policy Board, consisting of nine members including the central bank governor and two deputy governors, meets once or twice a month to review the status of interest rates.

To ensure financial system stability, the central bank lends to banks and brokerages in emergencies. This is why the BOJ is called the “lender of last resort.”

If a financial institution is about to fail, the BOJ can extend an unlimited amount of unsecured loans to the institution to maintain financial system integrity in line with the BOJ Law.

In 1997, the BOJ extended ¥1.2 trillion in special loans to the now-defunct Yamaichi Securities Co. and ¥2.6 trillion to Hokkaido Takushoku Bank to make sure they had enough cash when panicked investors and depositors made runs after these institutions’ failures were made public.

What other roles does the BOJ have?

One of the key functions of the BOJ is to issue bank notes. The actual printing is carried out by the National Printing Bureau, a quasi-government organization, and transported to the BOJ.

The BOJ keeps secret how many bank notes it has at its headquarters and branches, but it says it has an “abundant amount to fulfill the needs of financial organizations.”

There are about ¥80 trillion in BOJ notes now in circulation, which if stacked in a pile would be about 356 times the height of Mount Fuji.

Until a few years ago, BOJ officials were paid their salaries in cash because bank notes are its major product.

The average life span of a bank note is four to five years for ¥10,000 notes and about a year or two for ¥5,000 and ¥1,000 notes, according to the BOJ.

The BOJ also is the “government’s bank.” The government has an account to deposit tax revenues and pay for its expenses. Few people know they can pay their parking tickets at BOJ offices, including its head office in the Nihonbashi District.

Why was the new BOJ Law introduced in 1998?

It was aimed at ensuring the central bank’s independence and transparency.

Under the old law, the Cabinet could appoint the BOJ governor and one deputy governor and the finance minister had the power to replace them. Diet approval is now required for these appointments.

The finance minister’s power to replace the top executives compromised their independence and made them sensitive to the government’s position on monetary policy decisions, observers said.

The new law stipulates that the governor and two deputy governors must be approved by both Diet chambers after being nominated by the Cabinet. The provision giving the finance minister the power to replace them was abolished.

Government officials — normally two officials from the Finance Ministry and the Cabinet Secretariat — attend the Policy Board meetings as observers and do not have the right to vote.

When the government opposes a BOJ monetary policy decision, it only has the right to ask the board to delay a vote on the decision until the next meeting. The board, however, can veto this request.

Speculation was ripe that the government planned to exercise that right in January 2007 when media reports said the BOJ was likely to double the benchmark interest rate to 0.5 percent. With a 6-3 vote, the board voted against a rate hike. The rate was raised the next month.

The BOJ’s independence from the government was an issue highlighted by the rejection by the opposition camp, which controls the Upper House, of the government’s nomination of former Finance Ministry bureaucrats as new BOJ governor.

The opposition parties said the nominees’ career backgrounds endangered the central bank’s independence from the ministry, even though one of the candidates had been a deputy governor for five years under Fukui.

Many observers say the 1998 BOJ Law ensures its independence to a certain extent, but lawmakers frequently try to pressure the central bank on monetary policy decisions, especially when it tries to tighten credit.

To ensure decision-making transparency, minutes of Policy Board meetings are disclosed afterward and the governor started to hold regular press conferences to discuss policy changes and views on the economy.

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